Inflation fear weighs down Shanghai, Mumbai

Chinese benchmarks Sinopec and Chalco again trade lower

By

V.Phani Kumar

HONG KONG (MarketWatch) -- Mainland Chinese and Indian markets fronted a broad Monday decline in Asia, as concerns about high inflation played on investors' minds in the region's two fastest-growing economies.

The Shanghai Composite jumped 3% Friday on energy companies after Beijing allowed them to raise prices of motor fuels and power tariffs, but the benchmark surrendered most of those gains, ending 2.5% lower at 2,760.42, on worries about the impact on consumers, as well as a rebound in crude-oil prices.

Kenny Tang, associate director at Tung Tai Securities in Hong Kong, said the investors were "waiting to see whether there will be some stimulus measures from the government" to lift sagging market sentiment.

The decline came in spite of a report that regulator China Securities Regulatory Commission planned to control the pace at which listed companies raise funds and clamp down on market rumors to bring stability to a market that ranks among the worst performers in Asia for 2008 to date. See full story.

India's Sensitive Index, meanwhile, was well on its way toward recording a fourth straight decline, down 1.4% to 14,364.08 by mid-afternoon, on expectations that the country's central bank could raise interest rates as well as banks' cash-reserve requirements to cool inflation. See full story.

Also to start the week, Japanese and Hong Kong indexes declined for a third straight session, with exporters such as Toyota Motor Corp. reacting in Tokyo to early losses for the yen against the U.S. dollar, while shares of China Petroleum & Chemical Corp., also known as Sinopec, and Aluminum Corp. of China, known as Chalco, ranked among the losers in Hong Kong.

The Nikkei 225 Average finished 0.6% lower at 13,857.47, on the heels of a 1.3% drop on Friday, and the broader Topix index gave up 0.7% to 1,347.93.

In Hong Kong, the Hang Seng Index slipped 0.1% to 22,714.96, although it recovered a large part of its early declines toward the close. The Hang Seng China Enterprises Index shed 0.9% to 12,236.31.

Tung Tai's Tang said likely buying activity by institutional investors in Hong Kong to shore up the value of their portfolios by the end of June, as well as "futures-related buying" ahead of Friday's expiration of June futures in Hong Kong, could provide support for the Hang Seng around the 22,500-point level.

In Asian currency trading, the U.S. dollar changed hands at 107.68 Japanese yen, after dropping as low as 107.10 yen earlier in the day. Late Friday, the greenback had fetched 107.40 yen in Tokyo and 107.33 yen in New York.

In a note to clients, Credit Suisse analysts wrote that they saw the recent hike in fuel and power prices as a "positive for the market in the near term as it will boost profits of the two key oil stocks," both part of major indexes.

"Besides, this shows the Chinese government's determination to rationalize the heavily distorted resources prices. However, in the longer term, the government's attitude on these prices will be more critical," they added.

August crude futures rose as much as $1.84 to $137.20 a barrel in electronic trading, after climbing $2.76 a barrel Friday on the New York Mercantile Exchange, when the July contract expired.

Shares of Chalco
ACH, -2.25%
(2600) skidded by 5.5% in Shanghai and by 7.7% in Hong Kong, retreating after the company said on Friday that its half-yearly profit was expected to fall by more than 50% from the year-ago period.

Steelmakers also fell amid expectations a rise in prices for raw materials as well as fuel and power costs could hurt their profits, with shares of Maanshan Iron & Steel Co. dropping 5.5% and Wuhan Iron & Steel Co. slumping 10.1%.

Meanwhile, trading was suspended in shares of Baoshan Iron & Steel Co., China's largest steelmaker, as well as Guangzhou Iron & Steel Co. and SGIS Songshan Co., pending an announcement from their respective parent companies about a restructuring of the steel sector in the Guangdong province in southern China.

Also lower in Tokyo, shares of Citigroup Inc. (8710)
C, -0.18%
dropped 3.7% in Tokyo. Overnight, The Wall Street Journal reported that the company may lay off as many as 10% of the 65,000 employees in its investment-banking division. See full story.

South Korean exporters also lost ground, with shares of Samsung Electronics Co. dropping 1.5% and Hyundai Motor Co. losing 1.9%.

And in Mumbai's afternoon trading, shares of State Bank of India dropped 4% and engineering major Larsen & Toubro gave up 6.4%, weighed down by worries that interest rates were likely to rise.

The rise in oil prices and worries about the U.S. financial sector hurt stocks on Wall Street to close out last week. The Dow Jones Industrial Average
DJIA, +0.72%
sank 220.40 points to 11,842.69, finishing below the 12,000-point level for the first time in three months, while the S&P 500
SPX, +0.59%
fell 24.90 points to 1,317.93 and the Nasdaq Composite
$COMPX
dropped 55.97 points to 2,406.09.

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